With Gasoline Prices Rising, Consumers Are Having A Tough Year

Raul Rivero fills up in Miami. Having less take-home pay at the same time gas prices are rising could dampen consumer spending, economists say.

Joe Raedle
/ Getty Images

Originally published on February 6, 2013 11:30 am

Business leaders involved in homebuilding, oil drilling or automaking are happy about the way 2013 has kicked off. Lower- and middle-income consumers, on the other hand, are feeling like the year has kicked them in the head.

"Consumers have not rebounded with the arrival of the new year," says Ed Farrell, director of consumer insight at the Consumer Reports National Research Center. "Middle-income Americans were particularly hard hit this month and appear to be losing ground."

Why, at a time when so many economic indicators are looking up, do so many consumers feel let down?

A Spike At The Pump

A big reason is the sharp rise in gasoline prices, with regular jumping 18 cents to $3.54 just since last week, according to the U.S. Energy Information Administration.

That was the biggest one-week jump in nearly two years, even though gasoline consumption has been falling as Americans shift to more fuel-efficient cars.

Some experts say gas prices may fall back later this year because much of the price hike is tied to one-time events. For example, last fall's Superstorm Sandy had a lingering effect by disrupting gasoline supplies, causing shortages.

Fires, too, have caused some disruptions at refineries. And now, as spring approaches, refineries face more interruptions as they switch from winter to summer fuel blends. Over the longer term, new pipeline capacity should open up and help gasoline prices recede through 2014, the EIA predicts.

But for now, with turmoil continuing in the Middle East and economic activity picking up again in Asia, oil prices may stay fairly high. AAA, the auto club, estimates that gas prices will keep rising into the spring, up to the $3.60-$3.80 range.

Carpooling In Ohio

Those higher prices are changing behaviors for customers of Mahmoud "Mike" Kassem, owner of a gas station in Struthers, Ohio. Reached by phone, he said that in his station's working-class area, the price increases "are hurting people a lot," so they are reducing trips to the gas station. "I hear people saying it all the time — they tell me they are cutting down on driving; they're combining their trips," he said.

And they are carpooling. "The guys who work in Cleveland — they'll drive three in one car," he said.

Tim Quinlan, an economist at Wells Fargo, said wealthier people who own stock are doing fairly well this year because of the run-up in share prices, which are now back to pre-recession levels.

"Financial assets have come back," Quinlan said. "But how much are low-income people participating in that? They have not experienced the wealth effect."

Smaller Paychecks

At the same time, workers are getting more money taken out of their paychecks, thanks to this year's expiration of a payroll-tax holiday. In 2011 and 2012, Congress lowered the taxes people pay into Social Security; the goal was to give workers more cash to help drive economic growth. But that "holiday" is now over. For someone making $50,000 a year, the change means a take-home pay cut of about $20 a week.

When Congress was considering whether to extend that and other expiring tax breaks back in December, "the focus was on tax rates for wealthier people, but what most people weren't recognizing was how this payroll-tax increase would affect lower-income families," Quinlan said.

Having less take-home pay at the same time gasoline prices are rising could dampen consumer spending, he predicts. "That combination will start to wear away at consumer confidence," he said.

So even though inflation is tame overall, workers are getting squeezed as they see more of their earnings going toward taxes and gasoline.

'Losing Ground'

Consumer sentiment has dropped, according to the Consumer Reports Index for February, which fell to 48.9 from 51.2 a month ago. The most pessimistic consumers were those living in households earning less than $50,000.

Farrell, of Consumer Reports, said a surge in hiring could improve the outlook for consumers, and the latest jobs data involving construction, energy, health care and manufacturing offered reason for hope.

But for now, lower- and middle-income families "appear to be losing ground," he said. "It's hard to imagine a scenario that will create significant improvements in confidence until consumers feel there has been a substantial upturn led by employment."